Using history as a guide, the 10% return in the first quarter of 2013 bodes well for the market. Sam Stovall, of S&P Capital IQ, was on CNBC this morning with a price target of 1,670 on the S&P 500 going forward 12 months as he expects investors will be willing to pay 14-15 times for earnings in 12 months. Stovall explained that since WWII, in the 11 times that a market went on to a new high, the average additional return was about 3% before falling 13% on average with 5 pullbacks of 5-10% and 6 corrections, but no bear markets. Stovall also explained that after a 4 year rally, history shows that in 83% of cases, there was a positive return in the 5th year with an average return of 21%. Finally, the S&P 500 in April has increased about 2% since the 1950s and 3% in the past 20 years and has not fallen in this month over the last seven years. Stovall expects that the defensive sectors should continue to outperform over the near term, but that there will be sector rotation by next year.
It looks like this 3% further increase that Stovall is talking about takes into the area of just above 1600 on the S&P. This projection is in the face of a slowing China which some believe is in the throes of a real estate bubble, the European mess which is seeing many countries have little to negative GDP growth causing higher unemployment vs the possibility of increasing austerity, and a U.S. economy that is being propped up by the Federal Reserve and at the same time is attempting to deal with a considerable government deficit and debt along with increasing taxes for both businesses and consumers.
FedEx (FDX), as part of the announcement of disappointing earnings several weeks ago, announced that the Latin American business is doing well, but that Asia has an overcapacity issue and Europe is also, of course, still weak. Caterpillar (CAT) also reported a weak quarter with an Asia/Pacific sales decline of 26% in February along with discussion of a difficult first half and uncertain second half of 2013 due to the still weak economic situation in the U.S. and a continued recession throughout much of Europe. Deere (DE), Volvo (VOLVY) and CNH Global (CNH) also announced disappointing results. In addition, copper prices are weak as they are sitting at an eighth month low due primarily to the slowdown in China.